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Edited Transcript of INRETC1.LM earnings conference call or presentation 16-Aug-19 4:00pm GMT

Q2 2019 InRetail Peru Corp Earnings Call

Lima Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of InRetail Peru Corp earnings conference call or presentation Friday, August 16, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gonzalo Rosell

InRetail Perú Corp. - CFO

* Juan Carlos Vallejo Blanco

InRetail Perú Corp. - CEO

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Conference Call Participants

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* Alonso Acuna Aramburú

Banco BTG Pactual S.A., Research Division - Strategist

* Arvin Bahl

TRG Management LP - VP & Research Analyst

* David Oropeza;AFP Habitat;Analyst

* Josseline Jenssen

Lucror Analytics Pte. Ltd. - Director Latam & Senior Credit Analyst

* Luis Adolfo Pardo Figueroa

Compass Group Peru - Co-Portfolio Manager & Head of Research

* Nicolas Larrain

JP Morgan Chase & Co, Research Division - Research Analyst

* Rafael Borja

i-advize Corporate Communications Inc. - SVP

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Presentation

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Operator [1]

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Good morning, and welcome to InRetail Perú's Conference Call. (Operator Instructions) It is now my pleasure to turn the call over to Rafael Borja of i-advize Corporate Communications. Sir, you may begin.

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Rafael Borja, i-advize Corporate Communications Inc. - SVP [2]

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Thank you, and hello, everyone, and welcome to InRetail Perú Second Quarter 2019 Earnings Conference Call.

Before we begin, I would like to remind you that today's call is for investors and analysts only. Therefore, questions from the media will not be taken at this time. If you are a member of the media and wish to direct any questions to the company, please contact directly the company after the call.

Joining us today from InRetail Perú are Mr. Juan Carlos Vallejo, Chief Executive Officer; and Mr. Gonzalo Rosell, Chief Financial Officer. They will be discussing the quarterly report distributed yesterday. If you have not yet received a copy of the earnings report, please visit www.inretail.pe on the investors section where there is also a webcast presentation to accompany the discussion during this call. If you need any assistance, please contact the Investor Relations team of InRetail Perú.

Please be advised that forward-looking statements may be made during this conference call, and they do not account for economic circumstances, industry conditions, the company's performance or financial results. As such, these forward-looking statements are based in several assumptions and factors that could change, causing actual results to materially differ from the current expectations. For a complete note on forward-looking statements, please refer to the quarterly report, which was issued yesterday.

At this point, I would like to turn the call over to Mr. Juan Carlos Vallejo, Chief Executive Officer of InRetail Perú for his opening remarks. Mr. Vallejo, please go ahead, sir.

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Juan Carlos Vallejo Blanco, InRetail Perú Corp. - CEO [3]

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Thank you, Rafael. Good morning, everyone. I'm Juan Carlos Vallejo. Thank you for joining InRetail's second quarter earnings call. Today, we will discuss the main highlights of InRetail's second quarter results. I will start with a quick introduction of market conditions experienced during the second quarter of the year and share our view for the rest of the year as well. And then Gonzalo will walk you through our earnings presentation.

During the second quarter of this year, we started experiencing a deceleration in consumption as the fall in public investment from recently established local and regional governments and the slowdown in private investment and consumer expectation due to persistent local political noise started taking its toll on the internal demand. In addition to that, our Food Retail and Shopping Malls segments faced a more challenging comparison basis versus the second quarter last year due to Peru's participation in the 2018 FIFA World Cup after 36 years, which significantly increased sales of some electronics and sport categories. Despite the weaker market conditions, InRetail still reported top line growth and a strong double-digit growth in EBITDA and net income with significant gross margin, EBITDA margin and net income margin expansions.

Our Food Retail segment managed to maintain its solid top line growth with mid-single-digit same-store sales in the quarter, and also managed to expand its growth and EBITDA margins despite the high relevance of the hard discount and cash and carry formats in the sale mix that remained in a developing stage.

Our Pharma segment on the other hand posted a 5% reduction in revenues due to a slow top line growth in the pharmacy units and the decrease in revenues in the MDM units as part of its reorganization to focus on more profitable Pharma lines. With that, our Pharma segment EBITDA experienced a strong 28% growth, reaching an EBITDA margin of 9.5%, and a net income margin of 4.2%.

Finally, our Shopping Malls segment reported another healthy quarter with a 2.9% same-store sales growth versus last year despite the FIFA World Cup effect, maintaining higher occupancy rates as we continue executing the construction of our flagship mall, Puruchuco expected to be operational by the end of this year. Going forward, we expect a slightly more challenging market condition and expect a consumption recovery only later in the year. The increased political tension in Peru after the President's intention to bring presidential and parliamentary election forward by 1 year, the development around the Tía María mining project and the escalation in trade tension between the U.S. and China have all contributed to a weakening of the Peruvian Sol in a still highly dollarized country and have negatively impacted consumer behavior.

Having said that, we still remain confident on fulfilling our growth and profitability guidance for 2019 shared with the market at the beginning of the year, which will be remarked by Gonzalo throughout the earnings presentation. With that, let me pass the word to Gonzalo, and as always, we look forward to answering your questions by the end of this call.

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Gonzalo Rosell, InRetail Perú Corp. - CFO [4]

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Thank you, Juan Carlos. Good morning, everyone. Thanks for joining us on this call. Before starting, I would like to remind you that since the beginning of the year, our financial statements fully reflect the adoption of IFRS 16. However, the numbers we will be discussing in this earnings presentation and on our management discussion and analysis report have been adjusted to exclude IFRS 16 effects, in order for them to be comparable to our results in the second quarter of last year. The bridge and reconciliation of the accounting numbers with the pre-IFRS 16 figures are shown in the last section of this presentation, and there is also information in the notes accompanying our financial statements.

Now please turn to Page 4 in our earnings presentation to start with our consolidated financial highlights for the second quarter of this year. As Juan Carlos mentioned a couple of minutes ago, despite the weaker market conditions, InRetail still reported top line growth and a strong double-digit growth in EBITDA and net income with a significant gross margin, EBITDA margin and net income margin expansions. InRetail registered a low single-digit growth in revenues in the second quarter, mainly explained by a contraction in the MDM unit of our Pharma segment, despite a solid revenue growth in our Food Retail and Shopping Malls segments.

Revenues reached PEN 3.2 billion, with a gross margin of 30% compared to 28.4% in the second quarter of last year. In terms of adjusted EBITDA, we grew 18.9% in comparison to the same period of last year, reaching PEN 324 million with an adjusted EBITDA margin of 10.3% compared to 8.8% reported in the second quarter of last year. Adjusted EBITDA growth is explained by a solid growth in our 3 business segments.

Finally, we reported a significant increase in net income due to our good operating performance in the absence of onetime expenses incurred in Q2 2018, expanding net income margin from 0.5% in Q2 '18 to 3.5% in the second quarter of this year.

Please turn to Page 5 to review our financial and operational snapshot of our consolidated figures. In terms of contribution, considering figures from the last 12 months, our Food Retail segment accounted for 42% of InRetail's consolidated revenues and 27% of consolidated adjusted EBITDA with an adjusted EBITDA margin of 6.7%. Our Pharma segment accounted for 54% of consolidated revenues and 49% of consolidated adjusted EBITDA with an adjusted EBITDA margin of 9.4%. Finally, our Shopping Malls segment accounted for 4% of our consolidated revenues and 24% of consolidated adjusted EBITDA with a net rental income margin of 78.9%.

We will now continue with our results by segment. Please turn to Page 7 to start with our Food Retail segment. Our Food Retail segment registered another quarter of double-digit growth in revenues, growing 11.2% in the second quarter in comparison to last year. This growth is explained by the net opening of 39,000 square meters of sales areas since Q2 '18, and a solid same-store sales growth of 4.1%, despite a high comparison basis of Q2 '18 due to Peru's participation in the FIFA World Cup. Our gross margin increased 80 basis points in the second quarter, reaching 26.8%, mainly due to lower weight of electronic categories of lower margins in the product mix and higher rebates from higher sales volumes.

In terms of adjusted EBITDA, Food Retail's adjusted EBITDA grew 15.6% in the quarter with an adjusted EBITDA margin reaching 6.4%. Despite a high penetration of new formats still in a development stage. Overall, we continued strengthening our multi-format strategy in the Food Retail segment with our flagship format, Plaza Vea, representing 85% of revenues; our high-end supermarket format, Vivanda, representing 5% of revenues; our hard-discount format, Mass, representing already 7% of revenues; and our recently launched cash and carry format, Economax, representing 3% of revenues.

As Juan Carlos already mentioned, despite the macroeconomic slowdown, which is negatively impacting consumption, we remain comfortable with our 2019 guidance for Food Retail of above 12% revenue growth and 15% EBITDA growth for full year 2019, which I shared with the market in the fourth quarter earnings call at the beginning of this year.

Please turn to Page 8 to review our Pharma segment. Our Pharmacies unit registered a top line growth of 1.2% in the second quarter impacted by the closing of approximately 100 stores through the second quarter of 2018 as part of the synergies plan related to the acquisition of Quicorp and the same-store sales growth of 2.3% in Q2 '19 over a challenging comparison basis of 7.4% same-store sales in Q2 2018. Gross margin reached 34.6%, 303 basis points above Q2 '18, positively impacted by the execution of synergies from the acquisition, which progressively materialized throughout 2018. Adjusted EBITDA margin for the Pharmacies unit was 10.7%.

In our MDM unit, we reported an 11.4% decrease in revenues due to our reorganization of the distribution business to focus on more profitable Pharma lines, which we started implementing last year post acquisition. MDM revenues were PEN 637 million in the quarter, slightly higher than those reported in the first quarter of this year. We expect revenues from the MDM unit to remain around these levels for the rest of the year since the fine-tuning has been mostly implemented, and start growing again in 2020. Gross margin was 13.7% in the quarter, which considers a reclassification of logistics expenses related to the distribution of products in the MDM unit from other operating expenses to cost of goods sold implemented in the fourth quarter of 2018 as per IFRS 15.

Finally, in our MDM unit, adjusted EBITDA margin was 4% in the quarter, in line with our margin guidance for the year for the MDM unit. Despite the macroeconomic slowdown, which I already commented on, we also remain comfortable with our 2019 EBITDA guidance for InRetail Pharma of PEN 715 million, which I shared in our fourth quarter earnings call at the beginning of the year.

Now please turn to Page 9 to review the highlights of our Shopping Malls segment. Our Shopping Malls revenues for the second quarter grew 5.1% versus last year with a tenant same-store sales growth of 2.9%, which was impacted by lower sales growth from anchor tenants due to a high comparison basis of Q2 '18 in the context of Peru's participation in the FIFA World Cup. This quarter we maintained our high occupancy rates of 96%. Our net rental income margin slightly decreased to 78%, mainly due to higher property taxes and increased insurance and security expenses. We registered an adjustment of a fair value of our investment properties of PEN 3.8 million compared to PEN 5.5 million in the same period of 2018.

Finally, we continued with the construction of Real Plaza Puruchuco, which we expect to inaugurate in the fourth quarter of 2019 as scheduled.

Now please turn to Page 10. This slide sums up our Food Retail sales area growth, Pharmacies openings and Shopping Malls GLA expansions as well as our same-store sales by quarter, which I have already highlighted. So I will move on to the next section.

Please turn to Page 12 to review our consolidated net income results. InRetail registered a gain of PEN 110 million in the second quarter of 2019 compared to a gain of PEN 15 million in the same period of 2018, mainly explained by a strong increase in EBITDA and lower financial expenses in comparison to the second quarter of 2018, which included PEN 73 million in financial expenses related to the acquisition of Quicorp and the associated liability management. Excluding onetime financial expenses, FX and mark-to-market from the valuation of investment properties, net income for the quarter reached PEN 104 million, growing 11.1% versus the adjusted comparable quarter of last year.

Now please turn to Page 13 to discuss our CapEx and cash flow generation. During the second quarter of 2019, we invested PEN 152 million in CapEx, mainly devoted to Food Retail for some openings, for store openings, and the expansion of our distribution center and to the development of our flagship project in the Shopping Mall segment, the Puruchuco mall. In terms of cash balance, we ended the quarter with PEN 409 million of cash.

Please turn to Page 14 to discuss our consolidated financial debt. As of June 2019, InRetail had a consolidated net debt of PEN 4,606 million with a net debt-to-adjusted EBITDA ratio of 3.4x, slightly below 3.5x as of March 2019. We continue expecting to close the year with a net debt-to-adjusted EBITDA ratio of 3x. InRetail resumed its dividend distribution policy temporarily put on hold in 2018, distributing $35 million in dividends in the second quarter of this year. We maintained a 2% exposure to U.S. dollar-denominated debt in line with the low exposure we achieved last year, having hedged through call spreads the total nominal amount of our $2 denominated bond issuances of last year until maturity.

Please turn to Page 15 to review our debt by segments. Supermercados Peruanos, our Food Retail segment, closed the second quarter of this year with a net debt of PEN 1,104 million and with a net debt-to-EBITDA ratio of 3x, slightly below the 3.1x ratio as of March 2019. We continue expecting to close this year with a net debt-to-adjusted EBITDA ratio of 2.5x. On the other hand, InRetail Pharma ended the second quarter of this year with a net debt of PEN 1,701 million with a net debt-to-EBITDA ratio of 2.6x, in line with the 2.6x of March 2019 due to the distribution of dividends to InRetail for distribution of InRetail Peru's $35 million dividend. At InRetail Pharma, we also expect to continue deleveraging towards the 2x net debt-to-EBITDA ratio at the end of this year. Finally, InRetail Shopping Malls ended the quarter with a net debt of PEN 1,600 million and a net debt-to-EBITDA ratio of 5.1x, slightly above the 4.9x as of March 2019 due to the construction of Puruchuco.

We continue expecting to close the year with a net debt-to-EBITDA ratio below 5.3x, in line with the guidance provided earlier this year, and slightly above where we are today as we continue deploying the remaining CapEx of our Puruchuco Mall, to be operational by the end of the year. This covers our presentation, and now we will be glad to answer any questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go ahead and take our first question from Luis from Compass Group.

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Luis Adolfo Pardo Figueroa, Compass Group Peru - Co-Portfolio Manager & Head of Research [2]

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First off, congratulations on the quarter. It's tough out there, here in Peru and the results show a great, great, great resiliency. So congratulations on the results, first of all.

Second, I want to get a little bit more on the seasonality for the Pharma business. Because to get to the PEN 715 million we should see a pickup in EBITDA generation in the second half of the year, correct? And maybe you could tell me where that increase in EBITDA would come from?

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Gonzalo Rosell, InRetail Perú Corp. - CFO [3]

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Perfect. Thanks, Luis, for the question. Indeed, we expect, as in previous years, some seasonality in our different segments, including our Pharma business. Given that the second half of the year tends to have a little bit more disposable income in the pockets of our consumers, given the strength of months like July and end-of-year, no, given the extra salary that people get in Perú in July and December. Aside from that also there are -- there is a slight seasonality in terms of weather that tends to increase demand for Pharma products in the third and fourth quarters of the year. So while we expect this -- the second quarter to be the slowest in general terms for different formats for the year, we expect a pickup in top line in our different formats and particularly in the Pharma segment as well within same-store sales for the third and fourth quarters and as well given slight rebalancing of sales mix, we expect a better gross margin in the third and fourth quarters of the year.

Also the incremental EBITDA for InRetail Pharma and particularly the Pharmacies unit should come from an acceleration in top line, supported by slightly better same-store sales and a slight improvement as well in gross margins, given the slightly different sales mix. And with that and no -- having seen already our slowest quarter for the year, we feel still comfortable with the guidance we gave of the PEN 715 million on a consolidated basis. And as well with EBITDA margin of 12% for Pharmacies for full year 2019 and the 4% EBITDA margin for the MDM unit for full year 2019.

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Operator [4]

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And we'll go ahead and take the next question from Nicolas from JPMorgan.

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Nicolas Larrain, JP Morgan Chase & Co, Research Division - Research Analyst [5]

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Congrats on the quarter. I had a bit of a follow-up on Luis' question. So on the MDM business could you give us a bit more color on this -- or this more focus in the most profitable lines, if you could give us a bit more details there? And given this shift in focus could we expect MDM margins in the, let's say, midterm to longer term be above the 4% we've discussed recently?

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Gonzalo Rosell, InRetail Perú Corp. - CFO [6]

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Thanks for your question, Nicolas. The fine-tuning of the organization we've been doing in the MDM unit since the acquisition at the beginning of last year has been basically to focus on the distribution of Pharma lines, mainly. Which -- and the most profitable Pharma lines as well. In that line, we've been getting away from some consumer line distribution and among that there was relevant representation that we have stopped distributing through our MDM platform that ended up negatively impacting our top line by a significant amount, around PEN 140 million full year 2019. We believe that we are already at a stable revenues level, and as I mentioned throughout our presentation, our expectation is to remain with a stable revenue on a quarterly basis for third and fourth quarter versus what we just reported for Q2. And start growing again in 2020 as we again start putting more emphasis in expanding the business. So in terms of EBITDA margin for full year, we continue expecting the 4%. So that should imply a margin improvement in the third and fourth quarter to get to the average of 4% full year. And midterm, we should get to probably 4.5%, as we continue implementing operational efficiencies in that unit.

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Operator [7]

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(Operator Instructions) We'll go ahead and take our next question from Alonso from BTG.

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Alonso Acuna Aramburú, Banco BTG Pactual S.A., Research Division - Strategist [8]

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So 2 questions on my end. Also in the Pharma business, Gonzalo, how should we think about the opening of new pharmacies, you had 70 pharmacies expected for this year, how back loaded should that be between 3Q and 4Q? And maybe you can give us some comments on -- you mentioned some improvement in same-store sales in Pharmacies. Can you comment what you expect in terms of same-store sales for the Food Retail dividend comps continue to be very difficult in the second half of this year?

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Gonzalo Rosell, InRetail Perú Corp. - CFO [9]

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Thank you, Alonso, for your questions. Indeed, we haven't opened that many stores so far in the year in the first half in our Pharma business. But we remain committed to starting opening stores in the third and fourth quarter to get to the 70 net additions for full year 2019. We have -- the pipeline is already identified. Most of those stores are in the process of opening or closing the negotiations. And as you know, with the track record we have of having opened 200 stores in InkaFarma alone in 2016, we don't believe there is any risk to get to the opening target of 70 net additions for 2019. And probably it should be slightly skewed towards the end of the year. But we will show openings in Q2 -- in Q3.

With regard to same-store sales, again, for the Food Retail segment as well, we believe the second quarter has been the slowest quarter in terms of same-store sales for the year, the comparison basis of last year was challenging. And in July, we -- we already saw a pickup both in Pharma and supermarkets in terms of revenue trends. (inaudible) August is a particular month with all the incremental political noise and so on, but we still believe and feel comfortable that we should experience an acceleration in same-store sales in the third and fourth quarter versus what we reported in our Food Retail and Pharma segments in the second quarter.

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Operator [10]

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We'll go ahead and take the next question from David from AFP Habitat.

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David Oropeza;AFP Habitat;Analyst, [11]

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First of all, I would like to start with congratulating you guys for increasing the margin in all segments. We are returning to margins that we have seen in 2016 and 2017 but...

(technical difficulty)

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Gonzalo Rosell, InRetail Perú Corp. - CFO [12]

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There is some noise from someone. Sorry, David, we couldn't hear part of your question given that there was background noise, I don't know if you can repeat that? Thank you.

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David Oropeza;AFP Habitat;Analyst, [13]

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Okay. Okay. I can repeat it. No problem. I would like to start by congratulating for increasing the margin in all the segments. We're returning to the margins that we saw in 2016 and 2017. But now with the MDM business that represents 20% of sales with only 4% of EBITDA margin. For me, what I see as an investor, that's very good news. And also I got surprised when I looked at the MDM sales figures because it was decreasing 2 digits, but then I realized that it is good for the company because EBITDA numbers increased in PEN 1 million in absolute numbers, increasing the overall margin and decreasing the size of the segment that is only a profit -- a fraction of the EBITDA margin of the whole holding, and its size not necessarily reflects its [strategic deposits] in my opinion. But what I can say and hear is that it is good to see a company that is focused on its profitability rather than only on its size. So my question is just a follow up of the previous questions, what can we expect of this segment in the future and I heard, Gonzalo, that it would be growing in the next year. Can you elaborate where the growth will be coming on your long-term EBITDA margin?

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Gonzalo Rosell, InRetail Perú Corp. - CFO [14]

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For the MDM unit in particular?

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David Oropeza;AFP Habitat;Analyst, [15]

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Yes. Only for the MDM unit.

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Gonzalo Rosell, InRetail Perú Corp. - CFO [16]

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Okay. Yes. Yes, indeed again, reinforcing the message I just conveyed, we expect to have almost gotten to the bottom of contraction of the MDM unit in the second quarter of this year. The third quarter and fourth should be stable versus what we reported in the second quarter. And then going forward as of 2020, we should start again expanding the business at around mid-single digit top line with an EBITDA margin that should be progressively evolving from the 4% we expect to have full year 2019 towards 4.5% in the midterm. Again, by -- as you mentioned, focusing on profitability and not only size. That's our expectation midterm.

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David Oropeza;AFP Habitat;Analyst, [17]

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Okay. But this growth will be coming with more distribution lines, with more products to sell? Or yes -- organic growth.

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Gonzalo Rosell, InRetail Perú Corp. - CFO [18]

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Yes, it will come with more distribution lines, particularly Pharma lines. It will also come with no, some of the synergies that we shared in our previous earnings call that I'm not going to get into all the details of that, but have to do also with -- the vertical integration and distributing some of the successful brands of our retail formats to our distribution platform and it's basically that. Putting more effort in more profitable Pharma lines and the distribution of some of our successful retail brands into the distribution platform.

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David Oropeza;AFP Habitat;Analyst, [19]

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Okay. So we would expect additional synergies there?

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Gonzalo Rosell, InRetail Perú Corp. - CFO [20]

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Yes. In the midterm, as we shared in our previous conference call, part of mid to long-term synergies that we continue expecting, capturing going forward should come through some vertical integration in commercial aspects like the one I mentioned. Taking some of our successful brands from the retail unit and distribute them through the distribution platform.

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David Oropeza;AFP Habitat;Analyst, [21]

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My second question is about the pharmacies. The same-store sales were 2.3, actually the lowest since the acquisition. Well, I tend to see this business [offsetting the lost market.] So I'd like to ask you if this deceleration, answers to a deceleration in volume or price. And the white-label drugs legislation impacting this way or it has no impact in the same-store sales?

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Gonzalo Rosell, InRetail Perú Corp. - CFO [22]

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It's -- the deceleration has been mainly in volume, in transactions, but has -- they are combination of having to do with an increase in average ticket. So it's not really lower units, it's a little bit of lower transactions with high average ticket given that transactions are incorporating bigger, larger amount of units per transaction. That's basically a combination. Going forward, we expect again a slight pick up for what we have seen already in July. We still deliver despite the political noise and the slow consumption. We'll be able to support an acceleration in our same-store sales in the Pharmacies unit as well. And we also have a slightly more benign comparison basis versus the third and fourth quarters of last year, given that the closing of the 160 stores that we had as part of the synergies plan ended up being implemented by the end of July 2018. So again we should start experiencing a slightly better top line growth as well given that we won't have that more challenging basis of having operated with a high number of stores last year in the comparison quarters.

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David Oropeza;AFP Habitat;Analyst, [23]

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Yes. And the last year in the second quarter were closed 100 stores, right? My question is these 100 stores were closed mainly at the end of the quarter or at the start?

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Gonzalo Rosell, InRetail Perú Corp. - CFO [24]

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It was almost 1/3 each month but slightly skewed towards the end of the quarter. So I would say average number of stores, we operated with about 60 lower stores in this second quarter, as compared to the second quarter of 2018, in terms of average number of stores operated during those 2 quarters.

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David Oropeza;AFP Habitat;Analyst, [25]

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Okay. Gonzalo, so my last question here, would you -- I know this is an old question, but I would like to ask it again because I think it's important. Can you explain with more detail the impact of the Mass stores in terms of growth margin in the Food Retail segment? And would you help us to know what to expect in the future with Mass when its stores reaches its target maturity?

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Gonzalo Rosell, InRetail Perú Corp. - CFO [26]

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Yes. Mass is definitely part of -- a major part of our multi-format strategy that aims that we accelerate the penetration of traditional trade in Peru. It represents about 70% to 75% of total food sales in the country. So we continue being very excited about the development of the format. Our intention is to continue opening stores. The aim for this is year is 150, which is in line with what we shared at the beginning of the year as well. And going forward probably it's going to remain at around 150 stores per year.

In terms of EBITDA contribution, this format still has a negative EBITDA on a consolidated basis. All the stores that we operate, given that many of them are still in early stages of development, in the process of fixed cost dilution and increasing the average sales per store, the format still doesn't contribute positively to EBITDA. That's also in line with what we shared with the market in previous quarters. Our expectation is that Mass and Economax will start contributing positively to EBITDA throughout 2020. And with that, the EBITDA margin expansion that we are still experiencing in the Food Retail business is the fact that Mass and Economax already weighed 10% of our Food Retail business revenues, should get benefited by the fact that we get into a positive contribution from these new formats during 2020.

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David Oropeza;AFP Habitat;Analyst, [27]

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Okay. Just to have a numerical guidance, I don't know if you can say it, but if there is a negative impact of about 15% of the business, actually your EBITDA margin, when they start to contribute, is going to go to 7% something like that?

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Gonzalo Rosell, InRetail Perú Corp. - CFO [28]

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We are not getting into that specific guidance at least yet. As you can see, our Food Retail business reported last year an EBITDA margin of 6.7%. We shared with the market at the beginning of this year our expectation to improve EBITDA margin for Food Retail by 10 to 20 basis points, and we remain confident with that guidance. Going forward, our expectation indeed, given that, as I mentioned, this format will start contributing negatively we should get above 7% in the midterm and hopefully, higher than that, 7.5%. But we haven't shared specific guidance for 2020 yet. But midterm, indeed, we are definitely committed to continue expanding our EBITDA margins for Food Retail progressively. It's -- we feel very proud of being able to manage that process successfully, despite the fact that new formats weigh even more today than a few months ago, and even with that we're still expanding the EBITDA margin of the Food Retail business. So we're happy with where we are, and we are working on continuing improving efficiencies and expanding EBITDA margin across the board.

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Operator [29]

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We'll take our next question from Josseline from Lucror Analytics.

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Josseline Jenssen, Lucror Analytics Pte. Ltd. - Director Latam & Senior Credit Analyst [30]

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I have 2 questions, well, actually 3. One regarding for the government proposal, like to reduce the cost of medicine. How it would impact Pharma results? How do you think about it -- with its state of aid and is it possible the government intervention in that matter?

My second question is regarding Shopping Malls. If you could tell us if you are -- which is your margins expected for the full year, and the guidance for EBITDA for the Shopping Malls? And last question is regarding dividends. How much dividends we should expect for the rest of the year for Pharma and Shopping Malls?

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Gonzalo Rosell, InRetail Perú Corp. - CFO [31]

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Thanks for your questions, Josseline. With regard to government initiatives to regulate the industry, we are not concerned about the different initiatives that have been evaluated or discussed in Congress or by government directly. Given that we operate with the lowest prices in the industry, always focused on taking health care and giving health care access to the emerging middle class consumers in Peru at the lowest prices and in the most convenient way in terms of not only price accessibility, but also our footprint, and now digital initiatives to improve delivery, rates and so on. So in general terms, our behavior is very, very good and complies with all the standards. We -- one of the regulations that has been more involved and lately been discussed on the press with regard to the industry has to do with the mandatory availability of portfolio of generic products in the retail Pharma stores throughout Peru. That is not aimed at the retail Pharma chains only -- is to all the retail Pharma stores that operate in Peru. As you know, there are more than 10,000 stores, retail Pharma stores all over the country, we operate 2,000 of them. So the mandatory availability of generic products wouldn't affect us at all. We already operate with a full portfolio of generic products with full coverage and availability, and therefore we don't expect any impact from eventual changes in regulation for our business.

With regard to the Shopping Malls business, the Shopping Malls business is a very stable business in general terms, as you can see the quarterly numbers that we have been reporting. And what we expect for full year is to remain, in terms of net rental marginat around 70% -- 75% -- 78.5% -- 78% to 78.5% full year 2019. We haven't given guidance yet for 2020. 2020 will experience an increase in EBITDA as part of the first full year of operation of Puruchuco, which is the flagship project we're in the process of constructing today, and with that we should experience a relevant increase in our EBITDA next year in the Shopping Malls segment of double digit. Given that we are adding about 20% increase in GLA with the operation of Puruchuco, it has 125,000 square meters of GLA. But we haven't shared a guidance in terms of margins yet -- margins should improve with the operation of Puruchuco given that its size should allow us to better dilute operational and overhead expenses.

And with regard to dividends, we distributed $35 million from InRetail to shareholders in the second quarter in May. We don't expect any additional dividend distribution for this year. And next year in the shareholder meeting of March or April, definitely we will propose again a dividend distribution then that hopefully, should be higher than this year's and -- but it's a little bit early to discuss that. And hopefully, it will be higher and in line with the evolution, the positive evolution of the cash flow generation of the business.

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Josseline Jenssen, Lucror Analytics Pte. Ltd. - Director Latam & Senior Credit Analyst [32]

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Okay. Only I'll ask a question regarding the EBITDA for the Shopping Malls. As the Puruchuco mall would add, like, 20% increase in the leasable area, the increase in the EBITDA will be, like, the same -- at the same percent, like, around 20% more of that or less of that according to your results given?

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Gonzalo Rosell, InRetail Perú Corp. - CFO [33]

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It will be double-digit increase in revenues and EBITDA in our Shopping Malls segment in 2020. But it won't be right off the bat 20% increase given that the mall has to go through a process of maturation. The guidance we shared in the past with regard to Puruchuco is that it will contribute with $20 million of EBITDA in 2021, which is its second full year of operation.

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Operator [34]

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And we'll take our next question from our Arvin from TRG Management.

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Arvin Bahl, TRG Management LP - VP & Research Analyst [35]

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And once again, congratulations on the strong results given the circumstances. Wanted to ask just 1 question regarding gross margin in the Pharma business. It seems that both in Q1 and then in Q2, your gross margin in retail Pharma has been lower than in Q3 -- Q3 '18, especially compared to Q4 '18. What do you expect for gross margin for retail Pharmacies in Q3 and Q4 of '19? And what have been the factors that had been pressuring the margin in the first 2 quarters of this year?

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Gonzalo Rosell, InRetail Perú Corp. - CFO [36]

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Thanks for the question, Arvin. What we expect for the second half of the year is a gross margin improvement that has to do with also some seasonality in the negotiation of rebates during the second half of the year. And also a pickup in same-store sales that should allow us to have growth also in Pharma categories. What happened during the first half of this year is that we slightly increased the mix of consumer categories that have slightly lower margins versus Pharma categories. But again, what we expect for the remainder of the year is an increase in gross margins that is more aligned to what we saw during the second half of 2018 and with that, we again feel comfortable to get to the guidance objectives we shared.

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Operator [37]

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And it looks like we have one more question and it comes from [Chelsea] from [IGON.]

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Unidentified Analyst, [38]

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I just have a couple of questions. The first one is more of a technical one. On Slide 15 where you show the net leverage of InRetail Pharma and in the footnote you mentioned about PEN 100 million dividend that you paid. But it says that the ratios have not been adjusted to reflect this. So should I infer that cash on a pro forma basis for the dividend payment is actually about PEN 100 million lower and pro forma net leverage is more like 2.75x? Is that correct?

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Gonzalo Rosell, InRetail Perú Corp. - CFO [39]

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No, no. What we meant there was that we haven't adjusted the leverage ratio to normalize the fact that we have lower cash now given that we distributed dividends. So we have reported higher leverage ratio because we ended up distributing dividends. That's what we meant to clarify with that footnote.

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Unidentified Analyst, [40]

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Okay. So the PEN 424 million in cash that you report here is after the dividend payment?

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Gonzalo Rosell, InRetail Perú Corp. - CFO [41]

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Exactly.

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Unidentified Analyst, [42]

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Okay. Got it. So 2.6x is the correct leverage?

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Gonzalo Rosell, InRetail Perú Corp. - CFO [43]

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Exactly.

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Unidentified Analyst, [44]

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Got it. Okay. And then my other question, you alluded to higher same-store sales growth in the second half of the year. But I believe earlier this year you were guiding for a mid-single-digit growth for the full year, which implies that you would need over 5% same-store sales growth for the rest of the year. Is that still what you are expecting or do you think that the full year growth will be a little bit lower than initially expected, given the 2.3% in Q2?

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Gonzalo Rosell, InRetail Perú Corp. - CFO [45]

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It's still going to be mid-single digit, but definitely that doesn't mean it's going to be [5], right? But it's going to be mid-single digit, yes, we expect to be better than the 2.3%, not necessarily where we were in the first quarter where -- when we reported 6.3%. But we still remain confident of the acceleration that we will experience during second half and get to the full year average of mid-single-digit same-store sales.

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Operator [46]

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And it doesn't look that we have any further questions on the phone line at this time. I would like to turn the call back over to management for any closing remarks.

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Juan Carlos Vallejo Blanco, InRetail Perú Corp. - CEO [47]

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As a final remark, I just wanted to highlight that despite the challenging consumption environment in Peru for the year, we remain confident on our ability to fulfill our growth and profitability objectives for the year on the back of our strong and well-renowned brands, our multi-format strategy, low prices and attractive value proposition supported by our permanent focus on operational efficiencies. Thank you all for participating in our earning call. If you have any follow-up question, please do not hesitate to contact any of us.

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Operator [48]

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This does conclude today's program. Thank you for your participation. You may now disconnect.